Mercer’s Pensions Risk Survey data shows that the accounting deficit of defined benefit (DB) pension schemes for the UK’s largest 350 companies deteriorated further between the end of October and the end of November 2014, with deficits increasing by £9bn to £98bn. The quoted funding level also fell slightly from 87% to 86%. This is driven by a further fall in bond yields (slightly offset by a fall in market implied inflation) increasing the value of liabilities from £681bn to £704bn. The increase in the value of liabilities is being offset by an increase in asset values. Asset values increased from £592bn to £606bn.
At 28 November 2014, asset values were £606bn (representing an increase of £14bn compared to the corresponding figure of £592bn as at 31 October 2014), and liability values were £704bn (representing an increase of £23bn compared to the corresponding figure of £681bn at 31 October 2014). At 31 December 2013, pension scheme deficits stood at £56bn corresponding to a funding ratio of 91%.
However, the market conditions are not preventing risk transfer activity, with TRW Automotive Inc. completing a multistage de-risking project consisting of an enhanced transfer value offer to deferred members and a £2.5bn buy-out of the pensioner liability of the TRW Pension Scheme.
Adrian Hartshorn, Senior Partner in Mercer’s Financial Strategy Group and strategic corporate adviser on the transaction, said, “With deficits remaining stubbornly high, some corporates are now choosing risk transfer exercises. The recent TRW transaction, the UK’s largest ever buy-out, demonstrates that combining the right investment strategy with liability management options in an innovative way still provides opportunities for liabilities to be settled cost efficiently.”
In relation to the continued upward trend in the deficit, “More of the same,” said Ali Tayyebi, Senior Partner in Mercer’s Retirement business. “The ongoing low levels of long dated bond yields means record levels of pension liability for the FTSE350 continue. A modest increase in asset values helped to mitigate the impact but could not prevent funding levels from falling further.”
Mercer’s data relates to about 50% of all UK pension scheme liabilities and analyses pension deficits calculated using the approach companies have to adopt for their corporate accounts. The data underlying the survey is refreshed as companies report their year-end accounts. Other measures are also relevant for trustees and employers considering their risk exposure. But data published by the Pensions Regulator and elsewhere tells a similar story.
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